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Tuesday, 25 December 2012

Pakistan: Islamic banking share rises to 8.2pc

According to Global Islamic Finance Report 2012, the size of the Islamic banking industry has grown to $1.35 trillion with the annual growth rate of more than 20 percent. Globally the Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks with Islamic banking windows operating in more than 75 countries, it said.

The share of Islamic banking in Pakistan has reached 8.2 percent in assets and 8.9 percent in deposits, said Shafqat Ahmad, country head of Al-Baraka Islamic Bank.

“Our Shariah experts have worked relentlessly to develop asset-based products. Five years ago, 99 percent of the Islamic banking transactions were in Muharaba and there were no asset-based products,” he said. Today, the share of Muharaba-based transactions has decline to 45 percent and 55 percent transactions are in asset-based products such as Ijara, Istasna, Sukuk and Musharqa, he added.

Ahmad said that Islamic finance, with its roots in a moral economic model that supports productive economic activity and discourages excessive leveraging and imprudent risk taking, can play an important role in rebuilding the financial system.

Investment financing has now peeped into Islamic banking, he added. “Islamic banks are now financing large projects such as fertilisers, etc. We are still behind Malaysia and some other Islamic countries in the Middle East where Sukuk market is flourishing and crowding out conventional banking products,” he said, adding that experts predict that the asset-based Islamic banking would largely replace conventional banking in these countries.

“Entrepreneurs in Pakistan are turning towards Islamic banking in large numbers,” said Ahmad, adding that they may change from one Islamic bank to another but they do not go back to conventional banks once they adopt Islamic mode of banking.

Islamic banking established its creditability during the 2008 global financial crisis, he said, adding that all Islamic transactions were backed by assets, while the global financial crisis was mainly due to paper-based assets traded many times over by different parties.

Iftikhar Ahmad, officer in an Islamic Bank, said Shariah-based banks are extremely cautious in their financial dealings.

Even the advertisement given by the Islamic banks are to be approved by its Shariah experts, he added.

The profits distributed by the Islamic banks to their depositors are strictly based on Islamic principles.

This, he said, is the reason that the profit rates of these banks vary every year.

However, the depositors get better return on their deposits than the conventional bank depositors, he said.

Islamic bank keep 50 percent as Mudaris fee on the profit on deposits, while the remaining 50 percent of the profit is given to the depositors, he said.

According to the State Bank of Pakistan (SBP), Islamic banking institutions appear more liquid as compared to the last quarter as depicted by the rising trend of liquidity ratios during the quarter under review.

Liquid assets to total assets (LA/TA) increased from 41 percent to 45 percent during the quarter ended June 2012, while liquid assets/ total deposits also depicted an upward trend from 50 percent to 53 percent during the same period. Both the indicators adopted a reverse trend in case of overall banking industry, he said.

One of the major contributing factors for this rising trend is the deployment of deposits in Sukuk, which constitute more than 70 percent investment of the Islamic banking institutions by the end of the second quarter.

(The International News / 23 Dec 2012)

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Oman central bank discusses Islamic instruments with ministry

Oman’s central bank is discussing the possible issuance of sukuk and other instruments which the country’s new Islamic banking operations could use to manage their liquidity, a top central bank official said.

“Central Bank of Oman has taken up with Ministry of Finance the matter of issue of Sukuk,” central bank executive president Hamood Sangour al-Zadjali said in emailed comments to Reuters, received on Sunday.

“Various details will be looked into,” Zadjali added without elaborating. He noted that introducing liquidity management instruments into markets had historically proved to be a challenge, but said it would be addressed in this case.

Oman announced last year that it would introduce Islamic finance, becoming the last country in the six-nation Gulf Cooperation Council to do so. Business activity is expected to start early next year, conducted by two full-fledged Islamic banks and the Islamic “windows” of six conventional banks.

A key issue for the bankers is how they can manage their funds in the fledgling Islamic money market; bankers have been hoping authorities will issue sukuk (Islamic bonds) and other forms of sharia-compliant paper that could be used for this purpose.

Rules for Islamic banking which the central bank published last week tightly restrict the use of tawarruq, a controversial form of Islamic transaction. Some bankers have complained that restricting tawarruq will make their liquidity management harder and expensive, slowing growth of the industry.

(Al Arabiya News / 24 Dec 2012)

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Islamic Financial Services Board needs to apply bolder approach

LONDON– The Islamic Financial Services Board (IFSB), the prudential and supervisory standard setting body for the global Islamic financial services industry, celebrates its 10th anniversary in 2013. Today, the IFSB is a far cry from those early days in March 2003 when it started operations at its headquarters in Kuala Lumpur with Prof. Rifaat Abdel Karim at its helm as its inaugural secretary-general. 

While his successor, Jaseem Ahmed, a former senior executive at the Asian Development Bank, who took over in April 2011, is trying to stamp his own style and vision on the multilateral organization building on the achievements of the past decade, it is clear that the latter still has several major challenges ahead to help facilitate an orderly and holistic development and integration of the global Islamic financial services industry. 

It remains a moot point whether the IFSB is perceived to be constrained by its mandate, which is to introduce prudential and supervisory standards, guidelines and practice notes for the global Islamic finance industry in consultation with various stakeholders to promote its orderly and sound development and thereby contributing to financial stability and economic growth. 

But to pursue an agenda relating to prudential and supervisory standards seemingly detached from the regulation, authorization, monitoring and enforcement of Islamic financial institutions (IFIs) in member jurisdictions per se is inexplicable because in today’s globalized world they are inextricably linked to each other.

What the IFSB must not do is to behave as if it is a mere multilateral political organization dabbling in passing with financial sector prudential standard setting matters. Financial sector prudential and supervisory standard setting, as other functions relating to the sector, has to be seen to be above politics, national interest and petty nationalisms. 
Otherwise the exercise becomes compromised at the onset and the achievements and progress similarly stunted. 

This is where character, political will and a thought provoking focused plan of action come into play. The onus is not only on the senior management but perhaps more importantly also on the Governing Council of the IFSB, which met in Jeddah recently and appointed Abdullah Saoud Al-Thani, Governor of Qatar Central Bank (QCB), and Mohammed Rosli Sabtu, Managing Director of Autoriti Monetari Brunei Darussalam (AMBD), as Chairman and Vice-Chairman of the Council for 2013 respectively. 

The IFSB has accomplished a lot, but it needs to use these achievements to consolidate its future strategy with a much more urgent and bolder approach, even at the risk of upsetting some of its members.

Its achievements are in some respects understated because they do not necessarily translate into instant headline grabbing or immediate impact initiatives given the nature of standard setting. 

In December, for instance, the Council of the IFSB at its meeting in Jeddah hosted by the Islamic Development Bank (IDB) admitted eight new members into the organization. 

This, according to the IFSB, brings the total membership of the Board to 184 members comprising 55 supervisory and regulatory authorities from the banking, capital markets and Islamic insurance (takaful) sectors in 41 jurisdictions, as well as eight international inter-governmental organizations, and 121 market players (financial institutions, professional firms and self-regulatory organizations).

The newly admitted members include the Capital Markets Authority, Kuwait and the National Insurance Commission, Nigeria as Full members; and the Financial Reporting Foundation, Malaysia, Prudential BSN Takaful Berhad, Malaysia, Safran Stratejik Yonetim ve Teknolojik Danismanlik Hizmetleri Ltd. Sti., Turkey, the Central Bank of the Turkish Republic of Northern Cyprus, Standard & Poor’s, Singapore, and the Gulf Bond and Sukuk Association, United Arab Emirates as Observer members.

In fact, the IFSB has managed to do far more to promote the internationalization, the demystification and the market education of Islamic finance among central banks and regulatory authorities, multilateral organizations such as the World Bank, the International Monetary Fund (IMF), the International Finance Corporation (IFC), the Basle Committee, and the International Organization of Securities Commissions (IOSCO), and other institutions in the space of a decade than the industry per se has managed to do in its three or so decades of contemporary existence. 

And yet even here there remain huge gaps. For instance many central banks or regulatory authorities from the 56 Organization of Islamic Cooperation (OIC) countries are yet to become members. Some prominent regulatory authorities are merely Observer members as opposed to Full members. These are revealing organizational nuances, which affect the very structure of the Board. There are those who question the current organizational model of the IFSB, which seems to have a perennial resource problem. They would prefer the organization to adopt an equity with concomitant voting rights structure, which could give it more resource stability and therefore operational efficacy. 

Similarly, the IFSB could hand hold new markets and entrants to Islamic finance by issuing a definitive Islamic Banking Authorization Standard.

Take the case of the Central Bank of Oman, for instance, which oddly is an Observer member while the Capital Markets Authority of Oman is a Full member of the IFSB. The sultanate, following the promulgation of a Royal Decree No 69/2012 issued on Dec. 6, 2012 by the Omani Ruler, Sultan Qaboos Bin Said, officially introduced Islamic banking into the local market on Dec. 8 by “amending some provisions of the Banking Law issued under Royal Decree No 114/2000” and adding “a new Title Six – Islamic Banking” to the said law. 

The Royal Decree No 69 became effective as soon as it was published in the Official Gazette No 993 two days later. This means that banks in Oman, hitherto the only Gulf Cooperation Council (GCC) country not to have introduced Islamic banking in its jurisdiction, can now offer Islamic banking products to customers and businesses subject, of course, to the approval from the CBO. 

However, even the IFSB admits that the best way to facilitate Islamic banking in a jurisdiction is through the adoption of a dedicated stand alone Islamic Banking Law which takes into consideration the specificities of Islamic banking principles. Yet key members continue to ignore this because they perceive Islamic banking as a mere niche market segment or others still perceive Islamic banking as a mere product offering for which it would suffice for the risks and marketing to be managed and regulated.

Asked “why has the Central Bank of Oman decided to go down this route by amendments to the existing law instead of trying to adopt a new dedicated Islamic banking law”, Hilal Ali Saud Al-Barwani, Deputy Governor and Vice President, Banking Control and Legal Department, Central Bank of Oman, told the Saudi Gazette that it was “really a question of speeding up the process, so it’s expediency. We believe the conventional banking law covers a number of things. So it was only a question of adopting articles specifically for the Islamic banking sector.” Al-Barwani also suggested that Oman may adopt a dedicated Islamic banking Law in the future as the industry settles down and grows. 

The point here is that if the IFSB had an Authorization Standard in place it could have helped its members such as Oman to start off on the right track with its legal framework instead of delaying it to the future. Surely this would contribute as much to market perception, certainty and confidence as would purely prudential and supervision standards whether on risk and liquidity management, insolvency measures for both IFIs and takaful companies, Shariah standards, etc. 

In fact, IFSB Secretary General Jaseem Ahmed, at the 9th IFSB Annual Summit in Istanbul in May 2012, alluded to the fact that underdeveloped enabling environments, weaknesses in the risk and liquidity management infrastructures within Islamic financial institutions (IFIs), the lack of greater consistency in Shariah opinions, and constraints to human resource capacity continue to be a cause for concern and a focus of policy action.

On the positive side, for instance on the adoption and implementation of IFSB standards by member countries and organizations, Jaseem Ahmed said the Board is making some progress, albeit slow. Another important sign is the emergence of national roadmaps and strategies for the development of Islamic financial sectors, and for their prudential regulation and supervision. 

The IFSB in March 2012 launched a new medium term strategy for the period 2012-2015, the Strategic Performance Plan (SPP) that will focus on: i) strengthening the stability and resilience of Islamic finance through the development of a range of new standards and guiding principles aligned with the changes in the global regulatory environment; ii) broadening the range of cross-sectoral prudential and supervision standards and guiding principles including capital markets and takaful thus supporting the development of new instruments; iii) educating its stakeholder community about its work and standards so as to support the adoption and implementation of these; and iv) the launching of a revised “10-year Framework and Strategies for the Development of the Islamic Financial Services Industry” which was first developed by the IFSB in collaboration with the Islamic Development Bank (IDB) and its research arm, the Islamic Research and Training Institute (IRTI). 

“The pursuit of financial stability”, said Jaseem Ahmed, “does not however solely depend on regulatory development and prudential standards. It depends also on collaboration and cooperation mechanisms that help all stakeholders towards achieving the common goals of a sound and sustainable financial services industry.”

Indeed, the IFSB and IOSCO are cooperating on introducing “Disclosure Requirements for Islamic Capital Market Products”. The Secretary General of IOSCO, David Wright, has in the recent past called for greater harmonization in disclosure requirements across jurisdictions where Islamic capital markets products are offered. 

Wright stressed that “the recent financial crises highlighted the importance of sound disclosure regimes in mitigating systemic risk and building confidence in the financial markets. Given the tremendous growth of the Islamic finance industry – an increasingly important segment of the global financial markets – it is essential to achieve greater harmonization in disclosure requirements across jurisdictions where Islamic capital market products are offered.” 

In response, Jaseem Ahmed, emphasized that promoting cross-border financing and investment through Islamic finance is critical to attaining the depth and scale in Islamic capital markets needed to be competitive. “This will require the adoption of robust regulatory and disclosure practices that give confidence to investors and consumers alike. IFSB hopes that this collaboration with IOSCO will facilitate a process leading to a set of practices that could be harmonized or mutually agreed upon,” he added.

Perhaps the IFSB can be excused for choosing the optimistic theme, “The Future of the Islamic Financial Services Industry: Resilience, Stability and Inclusive Growth”, for its 10th Anniversary Annual Summit which Bank Negara Malaysia, the central bank, has offered to host on May 14-17, 2013 in Kuala Lumpur. 

The challenge for 2013 is to match this optimism with a more urgent and bolder operational plan through the adoption of not only the usual suspects of outstanding standards and guidelines but also others which are outside that operational black box – all of which would make the IFSB a more effective and relevant organization serving the global Islamic financial industry.

(Saudi Gazette / 23 Dec 2012)

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Push for Islamic finance in Bermuda

Cheryl Packwood, the chief executive of Business Bermuda, was in Dubai this month as part of one of her regular trips to the Arabian Gulf.

As the region grows in importance as a centre of Islamic finance, Ms Packwood is keen to publicise Bermuda's role in supporting Sharia-compliant products as well as promoting the territory as a place to do business.

As the group's recent Islamic Finance Report identifies, Sharia is "probably the fastest growing of all financial products and services" with global Islamic banking assets growing to US$1.2 trillion (Dh4.4tn) in 2012. It goes on to say that "increasingly the heart of Islamic finance is in the six nations which together comprise the Gulf Cooperation Council".

The report also outlines the numerous facets that make Bermuda a good place to do business. First, the territory has a 50-year track record in creating new financial products that promote cross-border investment.

Second, it has an advantageous tax environment: there is no tax on income or profits or capital gains. There is no withholding tax and no restrictions on the cross-border movement of capital. Third, Bermuda has a regulated environment that offers transparency, compliance and investor protection.

Fourth, the territory hosts a range of international firms including PricewaterhouseCoopers, KPMG and Deloitte. "No other country in the world has a higher percentage of actuaries, accountants or underwriters among its population," the report says.

"This not only facilitates business but ensures that existing businesses grow."

Finally, as photographs of the dazzling turquoise waters and white beaches show, Bermuda offers pleasant quality of life.

(The National / 23 Dec 2012)

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Islamic finance growing

MANAMA: International Islamic Financial Market (IIFM) is making progress across a wide range of Sharia products issued, its 27th board meeting was told.
The meeting was hosted by Kuwait Finance House - Bahrain (KFH-Bahrain) at their headquarters in Manama.
"Progress on Interbank Unrestricted Wakalah standards, Islamic Currency Hedging product standards and Collateralised (Rahn) Product Standard are all moving ahead," said IIFM chairman and Central Bank of Bahrain (CBB) executive director of banking supervision Khalid Hamad.
The board also agreed on the initiation of several new standards, including Ijarah sukuk standardisation as well as consultation on credit support arrangement concerning Islamic hedging.
Mr Hamad said the board appreciated IIFM industry briefing seminars and workshops which are creating better understanding and awareness on key components of Islamic capital and money markets in various jurisdictions across the globe.
IIFM recently held an industry seminar titled Islamic Capital Markets, Liquidity Management and Risk Mitigation Instruments, which included sessions on various areas such as sukuk, Inter-Bank Unrestricted Wakalah, Collateralisation and Tri-Party arrangements for Islamic Securities, Islamic Hedging and Islamic Real Estate Investment Trusts.
The meeting was attended by senior representatives of Bank Indonesia, CBB, Central Bank of Sudan, Islamic Development Bank, Autoriti Monetari Brunei Darussalam, Labuan Financial Services Authority-Malaysia, KFH-Bahrain, ABC Islamic Bank, Credit Agricole Corporate & Investment Bank and National Bank of Kuwait.
IIFM chief executive Ijlal Ahmed Alvi thanked the board and CBB for their continuous support.
He also thanked KFH-Bahrain for hosting this meeting at their headquarters.
He stressed the importance of IIFM market unification efforts particularly in the area of liquidity management and risk mitigation and hoped that these standards will soon be adopted and implemented across the global market.
He noted that Islamic finance was becoming one of the key sectors in global finance, and hence "it is essential to unify certain aspects and practices of the Islamic finance industry.

(Gulf Daily News / 24 Dec 2012)

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